The FRC has conducted research into the audit quality of the top six firms, with PwC coming out on top
The Financial Reporting Council (FRC) has conducted research into the top six accounting firms’ audit quality, looking at PwC, Deloitte, EY, KPMG, Grant Thornton and BDO.
The firm found that quality of FTSE 350 audits is steadily improving, with 81% requiring only limited improvements – although the level of quality was lower for smaller firms.
The firms that had audited the most companies through 2016-2017 were PwC and KPMG, who conducted 472 and 466 audits, respectively. Of these, PwC audited 32 FTSE 100 companies and KPMG audited 26 FTSE 100s.
PwC delivered the strongest record of audits – out of a sample of 27 audits looked at by the FRC, none required “significant improvements” and 25 were classed as “good or limited improvements required”. EY also delivered a strong set of audits, with none requiring “significant improvements”, although this was out of a smaller sample of 17 audits.
Deloitte, KPMG and BDO came out in the middle of the pack.
The firm requiring most improvement in its audit practice was Grant Thornton. Out of a sample of eight, three of the firm’s audits required “significant improvement”.
Grant Thornton commented on the results in the report: “We are disappointed with the results of audits reviewed this year. This is not in line with the results of our most recent internal reviews or the previous year’s FRC review, but these are important findings and we take them seriously.”
Areas needing improvement
In their detailed reports the FRC also recommended areas for improvement and outlined key areas requiring action to improve firms’ audit quality.
The need to strengthen firms’ “audit of revenue recognition” was an oft-cited issue, raised in some form for five out of six firms. Meanwhile, for PwC, this was named as an area of progress, with the report indicating that it has improved audit quality by “further embedding data analytics for use in the audit of revenue”.
Another area needing improvement across the board was “management in relation to areas of judgment”, specifically “with regard to impairment reviews and judgmental valuations.” Although some firms showed signs of progress in areas of judgment, it will still cited as an area needing further improvement.
Areas of progress
The reports also highlighted progress made by firms to increase their audit quality, one of the key actions being to put in place appropriate guidance and training schemes for various areas of audit practice, such as technical skills, use of data analytics and the production of information.
PwC commented on the importance of this: “Appropriate coaching and review are behaviours which underpin the quality of all our audit work and a number of actions have been taken in previous years to stress their importance. Coaching, supervision and review was a theme running through our 2016 technical training programmes.”
High quality communications with the Audit Committee was also of utmost importance.
The FRC has begun cracking down on audit quality following a series of accounting scandals, including fining PwC £5m over their Connaught audit and launching investigations into high profile audits such as KPMG’s Rolls-Royce account.